China’s 2023 Outlook
This article was originally published in Italian in Panorama on 9th January 2023.
Please note that this is a courtesy translation of the Italian language article originally published in the Panorama Magazine Issue at: https://www.panorama.it/economia/cina-previsioni-dati-commercio-2023
After the announcement from the Chinese Communist Party, which states that from January 8th travelers to China will no longer be subject to quarantine, many existing and prospective investors, international students, high ranking politicians, tourists, diplomats, business organizations and everyone in between have taken notice of the long-awaited return to normality in China. With the new year upon us and huge economic shifts abound, we shall examine how China’s marketplace is poised for 2023.
Nevertheless, the Chinese economy will likely face an entirely different set of post-pandemic challenges in 2023, with low levels of vaccination, particularly among the elderly, coupled with a less comprehensive hospital network prepared to deal with mass infections, which have up until now, left the Chinese authorities reluctant to move towards a 'living with Covid' policy and a more predictable business environment for investors.
Reopening Impact on Growth: Domestically
Domestically, the last few years, 2022 included, have been complicated for China’s growth, with GDP growth on track for 2.7% in 2022 according to latest estimations by the World Bank, significantly lower than the “around 5.5%” growth target set at the beginning of the year and vastly lower than the 8% growth in 2021, the exiting of the ‘dynamic zero Covid’ policy, while a positive signal in term of economic stimulation does still pose risks and calls for caution.
Daily new COVID-19 infections in China are believed to have reached several hundred million based on figures released by regional authorities, amid the rapid spread of the coronavirus since the government significantly relaxed its strict measures.
Due to the rapid increase of COVID-19 infection cases in China, the demand for Pfizer’s COVID pill Paxlovid has also greatly increased domestically, retailing at about 2,300 RMB (315 Euro) and may be offset via a patient's social security contributions. While the introduction of the antiviral drug to the Chinese market is an initial good sign, we certainly hope that in order to assist those with severe conditions and in urgent need of treatment, there can be a clear timeline for the rollout of mRNA vaccinations and antiviral drugs to the population at large—that can provide certainty and predictability, as recommended by the European Chamber of Commerce in China at the end of November following the beginning of COVID optimization measures in the country.
Should efforts be accelerated on public health preparedness now, a safer and less disruptive re-opening could be enabled, in increasing vaccination rates among vulnerable groups, the rollout of a booster campaign, increased access to effective COVID-19 treatments, and efficient use of limited hospital capacity for severe cases. Policymakers are likely to keep policies accommodative during the first half of 2023 to support overall growth, with infrastructure investment to stay strong in H1 while growth drivers should rotate to consumption and services in H2. Consequently, China’s consumption and investment amid its gradual reopening would boost the overall growth outlook for the region, given China is the single largest trading partner of 16 major Asian economies.
All in all, if we see a normalization of the Chinese economy this could significantly ease the supply chain disruptions that have contributed to rapidly rising goods inflation globally, with a rebound in growth in China could also boost demand for global commodities and another likely driver of lower inflation and business predictability in 2023.
Reopening Impact on Growth: Globally
In order for an effective return to business as normal and a rebound of growth in the Chinese economy, since the start of December, a number of provinces and cities in China have organized business delegations composed of government business leaders, representatives of enterprises and institutions to go to Europe to carry out economic and trade promotion activities and vowed stronger support for economic growth. This is of course an amazing development considering the lack of people to people exchanges between the E.U. and China over the past three years.
In December alone, business delegations from Hubei Province set off to Germany and Sweden for an 8-day overseas investment promotion, Zhejiang province conducted a six-day trip to Germany and France on a flight chartered by the provincial Department of Commerce, as well as a delegation of over 200 business executives and government officials led by the government of Suzhou, east China's Jiangsu Province and a city with the highest concentration in a Chinese cluster of Italian manufacturing companies, traversed to France and Germany. The Suzhou delegation visited 325 enterprises and institutions and signed 37 projects, participated in 29 investment fairs, harvesting a total investment intention of 5.9 billion Euros.
The main purpose of these delegations is to introduce the latest regional industrial policies to foreign enterprises, while also exploring the latest technology and products of foreign enterprises and look for the possibility of introducing them to the Chinese marketplace.
Such investment-based promotion activities are expected to boost the confidence of foreign investors and to enhance their belief in continuing to invest in the Chinese marketplace, which has weathered considerable storms in the past few years but is now looking to restore a sense of trust and predictability with foreign investors once again.
Industry Spotlight in China 2023
Regarding industries of note in China for foreign investors this year, despite a transforming Chinese economy, the country's manufacturing sector is still a pillar of growth, but the last three years have dented the well-established industry, especially as global supply chain disruption has made it challenging for manufacturers that source materials from China, prompting many to diversify sourcing by adopting a “China, Plus One” strategy.
We can expect such strategies to remain leading manufacturing trends in 2023, as companies attempt to reduce or eliminate dependencies and remain resilient in the face of future supply chain disruption. With that being said, with the removal of COVID control policies, the preferential treatment for NEVs manufacturing as well as government policy support in 2023 for high-tech manufacturing sectors remaining consistent as part of China’s “Dual Circulation” strategy, the country is looking to enhance the self-reliance of the domestic manufacturing economy amid elevated global uncertainty.
To this effect, China’s National Development and Reform Commission and the Ministry of Commerce have recently expanded the 2022 Catalogue of Encouraged Industries for Foreign Investment in the fields of end products manufacturing, components and parts manufacturing, & raw materials manufacturing, in order to provide favorable policies to facilitate foreign direct investment in such encouraged industries.
In terms of the luxury sector, shares of major luxury groups rose upon the breaking of the news of the end of the ‘Zero COVID’ policy. For example, shares in LVMH Moët Hennessy Louis Vuitton saw a 2.7 percent rise, Kering increased as much as 2.2 percent, Hermès International jumped more than 2 percent, while Compagnie Financière Richemont shares were up 4 percent. McKinsey expects the luxury sector to grow between 5 and 10 percent in 2023 globally, driven by good momentum in China, with projected growth between 9 and 14 percent. However as mentioned, the beginning of 2023 will remain challenging, as rising cases have stopped people from going out and shopping and several brands had to shut their stores temporarily due to all employees testing positive for COVID-19, a full rebound for the luxury sector should be expected in the later quarters of the year when retail and consumption are expected to skyrocket.
Growth Projections 2023
Sectors that have been most constrained by COVID Measures in recent years such as travel and entertainment, have the most room to recover and even projected to grow in 2023, alongside consumption growth accelerating, especially for household consumption and services industries, imports are to follow suit benefiting from likely stronger domestic demand after the expected reopening of China’s economy.
Policy persistence in structural reform measures facilitating the gradual transition of the Chinese economy away from relying on traditional drivers (such as property investment and traditional infrastructure construction), to depending on more “high-quality” and sustainable drivers such as high-tech manufacturing and renewable energy mean that new infrastructure decarbonization projects remain solid opportunities for foreign investors to explore in 2023 thanks to continued policy support.
It should be noted that as China is committed to reach peak carbon dioxide emissions by 2030 and achieve carbon neutrality by 2060, the country’s investment in low-carbon development expected to cross the 100-trillion-yuan mark in the next 30 years.
While European companies have deployed effective decarbonisation technologies in their home markets and want to work with China to help it quickly frontload, this will require providing European companies with increased market access and a level playing field on which to operate, so that they can make greater contributions to the country’s lofty goals and as referenced as such in the European Union Chamber of Commerce in China' s 2022 publication, Carbon Neutrality: The Role of European Companies in China’s Race to 2060.
Conclusion
All in all, projections seem adamant that 2023’s outlook for China is highly dependent on the containment of COVID outbreaks in Q1, especially considering the upcoming Chinese New Year at the end of January, Chinese local governments are already preparing for a large spike in the number of Covid-19 cases as people start to return home from the cities to their rural hometowns amid eased pandemic control and prevention measures. If extensive case numbers can be contained to the first quarter of the year, the economy is set to recover steadily over the course of the year, with an anticipated rebound in economic activity and gradual return to normalcy of work and life.
Regardless of the predictions, the 2023 budget will be unveiled in March at the National People’s Congress’ 2023 Two Sessions, alongside more concrete economic policy which will further dictate how 2023 in China will play out.
Edited by: Att. Carlo D’Andrea, Vice president of the European Union Chamber of Commerce in China
